Tag Archives | supplier

Overhead Expense Reduction

See Also:
Predetermined Overhead Rate
Activity Based Costing vs Traditional Costing
Activity Based Cost Allocation
Standard Cost

Overhead Expense Reduction

As a general precursor to Overhead expense reduction, Group Purchasing Organizations, Co-ops and Consortiums always lead to lower prices because they aggregate spends and create buying power. This may be true for smaller spends but as spends get larger ($100,000+ annually), you will often do better on your own when a supplier can customize a program to your specific purchasing patterns and needs.


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Category Specific Expertise

In reducing overhead expenses, expertise in purchasing for one cost category or in the request for proposal process will produce similar results in another cost category. What expertise in purchasing really means is an understanding of the unique data requirements and what drives supplier pricing to achieve the best results. You may use the same process in different categories. But without the category specific information, the results may not be the same at all.

Category specific information includes changes in the industry, contract nuances, and benchmark data.

Stay Loyal to The Supplier

Loyalty to a supplier always translates into the best value for your company (value = price + service) as well as the best opportunity to reduce overhead expenses. Quite often, long time loyalty leads to complacency from both the supplier and the purchaser. Industries and companies change over time and vendors providing operating supplies and services are no exception. Modest price increases year after year may seem acceptable when in reality the market may have changed, and the cost should actually be going down year after year. Compounding increases add up over the years.

How To Reduce Overhead Expenses

There are three things that you can do to reduce overhead expenses:

  1. Lower Costs with Incumbent Suppliers
  2. Ask Vendors to Help Manage Spend
  3. Create a Competitive Environment for Each Category

Lower Costs With Incumbent Suppliers

Ask your incumbent suppliers what you can do that will result in lower costs from them. Lower Cost can lead to a smaller Overhead-Rate which ultimately can lead to a reduction in overhead expenses. Work with your vendor as a team member – not as an adversary. If you can change a process or an ordering habit in your organization that reduces your vendor’s expense, then your vendor should reward you with lower prices which can lead to reduced overhead expenses.

Ask Vendor to Help Manage Spend

Then, ask your vendor to help you manage the spend. A proactive approach must be taken to reduce overhead expense. Are you leveraging the vendor’s platforms for ordering and managing information? Or can they track purchases by department and provide invoices already allocated to departments to ease the work of your Accounting Department? Can they inform you if employees do not follow established business rules (e.g., buy-off contract)? Do they have the technology to prevent your employees from buying off contract without proper approval?

Create Competitive Environment for Each Category

Finally, create a competitive environment for each category. Let your team and vendors know that there are no “sacred cows“. Have someone other than the supplier’s daily contact manage the expense review process. This enables greater objectivity and keeps personal relationships out of the process. Then give suppliers all of the information they need to sharpen their pencils and minimize their risk. The more they know about your usage and requirements, the better. Customers who inspire confidence and minimize the suppliers’ risk are rewarded with the most aggressive pricing. Reducing overhead expense requires an understanding of both your personnel, as well as the vendor’s.

When you know your overhead and how much you need to reduce it by, you can add real value to your organization.

The CEO's Guide to Improving Cash Flow


Overhead Expense Reduction

Originally posted by Jim Wilkinson on July 24, 2013. 

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Supplier Power Analysis

See Also:
Supplier Power (one of Porter’s Five Forces)
Signs a Company is in Trouble
Problems When Experiencing Business Growth
Threat of New Entrants
Intensity of Rivalry

Supplier Power Analysis

When analyzing a given industry, all of the aforementioned factors regarding Porter a supplier power analysis may not apply. But some, if not many, certainly will. Of the factors that do apply, some may indicate high supplier bargaining power whereas some may indicate low supplier power. But the results will not always be straightforward. Therefore, consider the nuances of the analysis and the particular circumstances of the given firm and industry when using these data to evaluate the competitive structure and profit potential of a market.

Download the External Analysis whitepaper to gain an advantage by overcoming obstacles and preparing to react to external forces, For example, an external force is when it is a supplier’s market.

Bargain Power of Suppliers is High/Strong

Bargain power of suppliers is high/strong if any of the following applies:

Supplier Bargain Power is Low/Weak

Supplier bargain power is low/weak if any of the following applies:

  • Concentrated buyers
  • Buyer switching costs are low
  • Buyer is price sensitive
  • Threat of forward integration is low
  • Buyer purchases product in high volume
  • Product is undifferentiated
  • Buyer purchases comprise large portion of supplier sales
  • Substitutes are available
  • Buyer is well-educated regarding the product

Supplier Power Interpretation

When conducting Porter’s 5 forces supplier power analysis, low supplier power makes an industry more attractive and increases profit potential for the buyer. Conversely, high supplier power makes an industry less attractive and decreases profit potential for the buyer. Supplier power is one of the factors to consider when analyzing the structural environment of an industry using Porter’s 5 forces framework. Supplier power examples include both markets for new and rare products.

When you assess the supplier power, do not neglect other external forces. If you want to overcome obstacles and prepare to react to external forces, then download the free External Analysis whitepaper.

supplier power analysis

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Supplier Power (one of Porter’s Five Forces)

See also:
Supplier Power Analysis
Porter’s Five Forces of Competition
Threat of New Entrants
Buyer Bargaining Power
Threat of Substitutes
Intensity of Rivalry

Supplier Power Definition

In Porter’s five forces, supplier power refers to the pressure suppliers can exert on businesses by raising prices, lowering quality, or reducing availability of their products. When analyzing supplier power, you conduct the industry analysis from the perspective of the industry firms, in this case referred to as the buyers. According to Porter’s 5 forces industry analysis framework, supplier power, or the bargaining power of suppliers, is one of the forces that shape the competitive structure of an industry.

The idea is that the bargaining power of the supplier in an industry affects the competitive environment for the buyer and influences the buyer’s ability to achieve profitability. Strong suppliers can pressure buyers by raising prices, lowering product quality, and reducing product availability. All of these things represent costs to the buyer. Furthermore, a strong supplier can make an industry more competitive and decrease profit potential for the buyer. On the other hand, a weak supplier, one who is at the mercy of the buyer in terms of quality and price, makes an industry less competitive and increases profit potential for the buyer.

Download the External Analysis whitepaper to gain an advantage over competitors by overcoming obstacles and preparing to react to external forces, such as it being a buyer’s market.

Supplier Power – Determining Factors

The supplier power Porter has studied includes several determining factors. If suppliers are concentrated compared to buyers – there are few suppliers and many buyers – supplier bargaining power is high. Conversely, if buyer switching costs – the cost of switching from one supplier’s product to another supplier’s product – are high, the bargaining power of suppliers is high. If suppliers can easily forward integrate or begin to produce the buyer’s product themselves, then supplier power is high. Supplier power is high if the buyer is not price sensitive and uneducated regarding the product. If the supplier’s product is highly differentiated, then supplier bargaining power is high. The bargaining power of suppliers is high if the buyer does not represent a large portion of the supplier’s sales. If substitute products are unavailable in the marketplace, then supplier power is high.

And of course, if the opposite is true for any of these factors, supplier power is low. For example, low supplier concentration, low switching costs, no threat of forward integration, more buyer price sensitivity, well-educated buyers, buyers that purchase large volumes of standardized products, and the availability of substitute products. Each of the four mentioned factors indicate that the supplier power Porter’s five forces emphasize is low. To help determine the level of supplier power in your industry, start by performing an external analysis. This tool will easily help you determine the level of all of Porter’s Five ForcesDownload the free External Analysis whitepaper by clicking here or the image below.

Intensity of rivalry

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Service Department

See Also:
Administration Expenses
Outsource Definition
Advantages of PEO Services for the Business Owner
Sunk Costs
Joint Costs

Service Department Definition

Many companies require support activities as well as core activities to produce their goods and/or services. Support services, or a service department, do not contribute directly to the production of goods or the providing of services, but they are necessary for the company to operate. In addition, consider service departments, support services, or administrative services support activities.

The costs associated with these support services must be treated in accordance with accepted accounting practices. They also may be allocated to the cost of goods and services produced by the company and/or allocated to other departments within the company. Furthermore, support services costs often comprise a large portion of overhead costs.

Because these activities are not the core activities of the business, managers often must decide whether to keep support service activities in-house or to outsource them. Often an outside organization that specializes in the particular support service in question can perform the activities in a more cost-efficient way. As a result, it may benefit the company to outsource that particular activity.

Service Department Cost Allocation Methods

In accounting, there are several methods for allocating the costs associated with service departments to the products produced by the company and also to the internal departments that benefit from the support services. These cost allocation methods include the following:

Support Services – Examples

Some examples of support service departments that you may commonly find in a company include the following:

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service department, Service Department Definition, Service Department Cost Allocation Methods

Source:

Hilton, Ronald W., Michael W. Maher, Frank H. Selto. “Cost Management Strategies for Business Decision”, Mcgraw-Hill Irwin, New York, NY, 2008.

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Product Life Cycle

Product Life Cycle Definition

A product life cycle, defined is the period from when a product goes through its initial specifications and research to the withdrawal of that product from the market. There are five product life cycle stages.

Product Life Cycle Meaning

The product cycle stages are as follows:

Research and Development

This is the phase where market research as well as the design plans for a product are initiated. Patents are established for the product during this phase to protect the product from competition. Production facilities might also be developed during this stage so that mass production can take place. The company might also establish its logistics for raw material suppliers and retailer customers.

Introduction and Growth

Here the company starts its advertising campaign as the product is sent out into the market. The pricing and promotion of this product are essential during this phase to ensure the product’s success.

Maturity

In this product life cycle the company will increase its production and logistics network according to demand. A company will also broaden the audience that it is promoting to as the product becomes more popular during this product cycle.

Decline

As the product loses popularity a company has generally three options. The first choice is for the company to offer the product at a reduced price. The second is for a company to add new features or revamp the style of the product. The decline stage is the last option. Eventually, this stage will move into the elimination of the product or the abandonment stage.

Abandonment

Here the entire product line is discontinued. A company liquidates all of the remaining inventory. If the product contained special facilities, then the company will liquidate those as well. Then, realize the salvage value for all equipment. This stage represents the complete end of that product and everything associated.


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Product Life Cycle

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Product Life Cycle

See Also:
Business Cycle
Cash Cycle
Company Life Cycle
Operating Cycle Analysis
Accounting Cycle

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Make-or-Buy Business Decision

See Also:
Company Life Cycle
Market Positioning
Marking to Market
Mining the Balance Sheet for Working Capital
Inventory to Working Capital

Make-or-Buy Business Decision

Make-or-buy decisions arise in business when a company must decide whether to produce goods internally or to purchase them externally. This typically is an issue when a company has the ability to manufacture material inputs required for its production operations that are also available for purchase in the marketplace. For example, a computer company may need to decide whether to manufacture circuit boards internally or purchase them from a supplier.

When analyzing a make-or-buy business decision, look at several factors. The analysis must examine thoroughly all of the costs related to manufacturing the product as well as all the costs related to purchasing the product. Such analysis must include quantitative factors and qualitative factors. The analysis must also separate relevant costs from irrelevant costs and look only at the relevant costs. The analysis must also consider the availability of the product and the quality of the product under each of the two scenarios.

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Quantitative vs. Qualitative Analysis

The make-or-buy decision involves both quantitative analysis and qualitative analysis. You can calculate and compare quantitative considerations. Qualitative considerations require subjective judgment and often need multiple opinions. Also, some of the factors involved can be quantified with certainty, while other factors must be estimated. The make-or-buy decision requires thorough analysis from all angles.

Quantitative factors to consider may include things such as the availability of production facilities, production capacity, and required resources. They may also include fixed and variable costs that can be determined with certainty or estimated. Similarly, quantitative costs include the price of the product under consideration as it is being priced by suppliers offering the product in the marketplace for sale.

Qualitative factors to consider require more subjective judgment. Examples of qualitative factors include the reputation and reliability of the suppliers, the long-term outlook regarding production or purchasing the product, and the possibility of changing or altering the decision in the future and the likelihood of changing or reversing the decision at a future date.

Relevant Costs and Irrelevant Costs

When making the make-or-buy decision, it is necessary to distinguish between relevant and irrelevant costs. Relevant cost for making the product are all the costs that could be avoided by not making the product as well as the opportunity cost incurred by using the production facilities to make the product as opposed to the next best alternative usage of the production facilities. Relevant costs for purchasing the product are all the costs associated with buying it from suppliers. Irrelevant costs are the costs that will be incurred regardless of whether the product is manufactured internally or purchased externally.

After you’ve identified the relevant costs and irrelevant costs in your company, download the free Top 10 Destroyers of Value whitepaper to learn how to maximize your value.

Make-or-buy business decision

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Make-or-buy business decision

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Due Diligence

See Also:
Due Diligence on Lenders
Auditor
Mergers and Acquisitions (M&A)
Audit Committee
Loan Agreement

Due Diligence Definition

The Due Diligence definition is an extensive qualitative and quantitative look at a company. It helps company leaders make the best informed business decision about a company. Furthermore, Due Diligence is often associated with audits, where it is required before a public offering. In addition, it is associated with mergers and acquisitions to reduce the risk in the market for these activities.

Due Diligence Meaning

Due Diligence often becomes necessary when a large transaction is about to take place like a merger or loan agreement, or when the company’s financials are going to be presented to the public. Oftentimes, due diligence requires the assessment to be both qualitatively as well as quantitatively.

Qualitative Due Diligence

A qualitative act of due diligence may be to assess the mental state and capability of the management. This can be done through the following:

Quantitative Due Diligence

In comparison, quantitative due diligence includes thorough investigations of the books and records. This can range from asset appraisals to day to day transactions. A thorough understanding of internal controls and its effectiveness also become necessary to ensure the risk for the business is as low as possible.

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due diligence definition

due diligence definition

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